Wednesday, July 12, 2006

Income is NOT Wealth

This posting goes along with some other posts I have done about saving money in order to invest and plan for the future. America as a whole needs extra encouragement to consider saving money, and I hope this posting helps motivate you.-------

Perhaps you make a great income in your current job. Well then, you must be wealthy! Wrong! Granted, you are good at making money, but unless you are equally good at being an accumulator of wealth (i.e. Savings!), you will forever remain income-rich and wealth-poor.

Perhaps you see your friends with new cars, homes, flashy clothes and accessories, and so on, and you presume them to be wealthy or rich. Well, unless they have inherited a large sum of money to begin with, or have been prodigious accumulators of wealth prior to spending money on these easily observed signs of spent cash, chances are they are not wealthy at all. First of all, most self-made wealthy people don't spend money on all sorts of flashy things - it goes against their entire formula for having accumulated their wealth to begin with, and furthermore, it would jeopardize their ability to remain wealthy. Chances are, the persons you perceive as wealthy are either (or both) good at producing income or even better at using credit, and their appearance of wealth is just that - appearance. As soon as their income slows or they can no longer service the credit they've taken on, it's all over for them; this may take many years to catch up with them, and if they are one of the lucky ones, they will maintain or increase their incomes over the years to keep up with, or further expand, their spending and perceived wealth.

Even those celebrities with all their flash and "Bling" are primarily dependent upon their income and not wealth. Certainly there are some famous people with plenty of wealth, but many of the "star of the moment" type have little going for them beyond their income, since many can not imagine being anything but famous and rich once the cash has started flowing, and likewise they don't prepare for the time where it no longer runs like water. And, many end up with very little in the end - consider famed performer MC Hammer, who even though making $33,000,000 in a year, was able to outspend his income with the help of his 40+ member entourage (for this any many more examples, see: http://www.legalzoom.com/articles/article_content/article5466.html. What you see in the actions of these very public displays of income and cash-disposal is not how the average wealthy person lives, since most self-made wealthy persons know what it takes to accumulate wealth to begin with, and do not want to jeopardize their way of life so hard earned.

I know it will be very difficult to live a life based on saving and investing when everyone around you exhibits a life based on spending and debt, and demonstrates their purchasing power everyday through their flashy cars, daily restaurant dining, and so forth. Trying to mimic this behavior will be quite costly, and very addictive. Leo Tolstoy described this type of situation perfectly in his book Anna Karenina - when the character Levin, who was never in debt and always saved money, found himself surrounded by persons that spent much money on all sorts of goods and services, and soon found himself doing the same, whether he could afford to or not, as this quote describes: "There are no conditions to which a man cannot get accustomed, especially if he sees that everyone around him lives in the same way." This is a timeless condition and threat to your wealth: just consider that Tolstoy's book containing this quote was written in 1877 in Russia. Some things never change, and the desire to spend and consume first, and worry about saving later, is just human nature, and something that you will have to, and can, overcome by following advice to constrain spending and save money.

Why worry about accumulating wealth when you make enough income to support your desired standard of living, and, why reduce your standard of living in order to save and invest more? Well, consider the following:

Income can go away quickly - your job, no matter how "safe" you feel in it, may not be here in the future. Your business may encounter massive overseas competition, or technology may render your current service obsolete. Another possibility none of us wants to consider is that we may no longer be able to perform our job due to illness or injury or even age.

Reduced Stress: think about how less stress you would have in your everyday life if you knew you could quit that job you hate so much, knowing you could afford to live without any wage income for 6 months, 12 months, or more without additional income.

Income tends to make you do things you otherwise wouldn't do - like taking a less-than exciting job, just because you have to, because you need the cash-flow to feed your expense-habits, and because you have no savings to fall back on and no income from investments to offset any loss of wages. Start reducing your expenses now, and attempt to save as much as possible. I always have considered savings / wealth a tool that gives you the power to say "I Quit" when you should; and, oh how good it would feel to know that if a situation is intolerable, you can simply leave. And, even more so, perhaps you'll soon find out that with the ability to "Quit" on your terms if necessary, you become more bold and take more chances, and end up securing more responsibility and more income in your career because the fear of job-loss does not constantly weigh you down.

I also see income-dependence, and lack of savings (i.e., wealth) as why most people will not even consider starting their own business for (justifiable) fear that they will not be able to instantly replace their existing income. Starting a business requires proper capitalization so you can get up and running. Starting your own business is a risk, but keep in mind that employers would not pay you what they do (in general) unless your value to them is more than what they pay you. So, if you can find a way to capitalize on your skills directly, you may find the risk returns equal rewards; but, it will likely take time to become established, and time requires savings to cover your expenses (side note: for this reason, I highly recommend starting a "side business" while employed full time in order to gain business experience and get a footing, or jump-start, prior to quitting your job -- it should reduce the savings required to make the leap to self-employment should you choose this route).

Saving, and wealth-building, is a long-term-plan approach to living; and a marked difference from an earn-and-spend approach to living. It takes commitment, and progress is slow. But, progress will also be noticeable within a few years when you start seeing noteworthy income being produced from the money you have saved and invested. And, you will feel a sense of accomplishment as your efforts progress. Worst case: you save, save, save, and feel no different -- well, at least you will have a chunk of money to spend on something when you cave in and return to the spending-path :)

About Me

I have spent much of my life working with computers, technology, programming, software development, and business consulting. I have a strong attachment to technology and science in general.

My interests and insight go well beyond computers though, as you will soon discover while you peruse my blog entries covering topics from finance to gluten free diets. I have even recently authored a Gluten-Free Dessert Recipes Cookbook of gourmet quality desserts for Celiacs and Wheat-Free / Gluten-Free individuals.

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